Welcome to CellaVision Q4 report 2022. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now I will hand the conference over to CEO Simon Østergaard. Please go ahead.
Thank you very much for the introduction, and welcome everybody to the conference call for CellaVision, where we report our Q4 results. As said, I will give a fourth quarter highlights, and then we can take questions. Our headline this time around is that we have an underlying demand for our services and offerings that we deem unchanged, but we certainly have external challenges that are persisting. Means that we are considering our quarter as another soft quarter on the top line. However, with control on our business and our cost base. We ended the fourth quarter with SEK 152 million in revenue.
That represents a negative growth of -7% or, with currency effect of +10%, we actually had an organic decrease of 17%. Okay. Of course, we're up against tough compares in Q4 and also Q1, Q2 coming up. However, this is certainly considered a soft top line. I will get into the EBITDA a little bit later, but that is SEK 48 million versus SEK 60 million last year, which represent 32%. The main reason we see from the top line challenges is really around our, you can say improved supply of components, the security of getting components, but also especially the increased cost of capital. That has led to reduction of inventory levels amongst our customers or our distribution partners.
There's a high focus on working capital, which has challenged our ordering pattern. We have for favorable currency effects. However, we've seen high inflation on our cost base to manufacture our products, so we have not had full compensation from the currency effects. We have a decline on the gross margin. With regard to the costs then, the numbers presented today do not include any price increases in Q4. We have negotiated our price increases, and they will be adjusted by Q1. This is here where we have achieved higher than normal price increases, which will come into effect from this current quarter Q1.
In terms of our strategic direction, in total, we estimate that we have increased the adoption of Digital Cell Morphology in the large laboratories. Now we estimate that we're at the, we've passed, 26% or we're around 26%, coming from 24% last year. We have seen positive feedback from the DIFF-Line. This is the workflow solution that we completed this year, last quarter. We're starting to see that with our distribution partners. We expect that to be positioned and launched by them. This is our MCDh reagents, our smearing and staining box that goes hand in hand with the DC-1 for the small labs. We're also getting traction from our reagent expansion. We launched our products.
We developed new products for APAC, new classic stains. In the report, you will see our progress on per country. We are starting to see some revenue coming out of APAC and not just Europe. If we go to the next chart, we will see the financial development of the company. 152 versus 164 last year. That leads us into a total revenue for the year of SEK 639 million . Again, I think our financial year is really depicted or characterized by a very strong H1.
The impact of the macroscopic impact, especially on the interest rate, the cost of capital, is where we see an issue. Also, the COVID situation, especially in China, has really impacted us. We land the year at 4% growth organically. Gross margin, 67% as said. Material prices, they've really gone up with the inflation. Of course, there's a function around the FX, what happens with the FX on the Swedish krona. We believe that our price increases will take us back in the normal area. Of course, with the uncertainty around the FX impact. Operating expenses landed in the quarter at 41% of revenue, that's equal to SEK 63 million.
We had provisions reserved for the incentive program for the company and management, and we released those SEK 5 million. That has led to lower operating costs. I'd also say on the R&D side, we had SEK 35 million spent, so that's 23% of sales. However, we managed to capitalize SEK 16 million. That's really a sign of 2022 has been a year where we've onboarded a number of new colleagues. Our management team has really worked hard on recruiting, and here we're starting to see output also on the projects in terms of capitalization. I think that's a good sign. In terms of the cash flow, we ended the year at SEK 28 million operating cash flow versus SEK 46 million.
We had, of course, the cash flow was impacted by the lower profit before tax and the increased inventory build-up that we've done. Essentially going from the operating of SEK 28 million down to the - SEK 8 million, that's the journey of capitalizing our R&D, as I said, SEK 16 million. We've also increased our investments in the production facility in France, where we are building a new factory. We have SEK 9 million spent SEK 9 million on that, which also impacts the cash flow here. We have financing of around SEK 11 million. That leaves us with a total cash flow of - SEK 8 million for the quarter.
We end the quarter and the year with a cash or liquids at the end of the year of SEK 108 million. Going into the regional highlights, starting with the Americas. Here our sales decreased to SEK 67 million. Obviously it's a decline on the quarter of -9%. We landed the total year at SEK 280 million. Actually it represents a full year growth of 34%. A healthy signal, but of course, very skewed with a lot of traction in the first year and weaker quarters in Q3 and Q4.
We, we've had, when we look at our sales, it's really what we call non-integrated systems, the DM models, that has not gotten the same traction. We have, here we also emphasize the interest for the DIFF-Line that's started to be marketed. The DC-1 as a standalone, which has been available for the American markets for a couple of years now, is continuing its journey of, it really resonates with the satellite labs and network labs up there. This is actually where we see the majority of our growth over the year. That's, that's positive. In EMEA, we have, we're going pretty much flat, SEK 61 million, versus SEK 60 million last year.
We also land at SEK 280 million in this region. Here we've, we really had focused on or we've gotten feedback in terms of working capital. The cost of capital seems to really fluctuate our ordering pattern. That has really led to slower sales and a flat year. We still have a lot of activities, so there's been no issues, COVID, obviously, in Europe. We have growing interactions with our partners, but also the end users. Bear in mind that the sales cycles are long here, but we are really working hard to penetrate the individual countries, and that's what we can see.
It's harder to penetrate EMEA across borders as opposed to the traction we have in America. Our Q's here are very, very tough region is APAC this year around. We landed the quarter at -21%, and the full year was -24%. Sales declined from SEK 31 million last year to SEK 24 million this year. Bear in mind, we only had a Q3, which was really weak, where we had SEK 8 million in Q3. Two very, very soft quarters in APAC, which results in just for Q4, or sorry, for the full year, a decline of -SEK 24 million from SEK 103 million down to SEK 79 million on the year. It's really COVID related in this region.
It's, we still have challenges, operating, moving around the country and especially in China, partly, Taiwan and Japan. Primarily China is the main jurisdiction where we really face issues, and we're not kind of out of the woods there. That has impacted both the demand, but also the challenge we had that we in Q2 had large order which was not installed, and that has been installed throughout the these quarters. This quarter we did ship an order, so we came up better than Q3. Yeah, I think we can proceed to the next one.
In terms of when we cut our sales per product groups, we still see traction for our instruments, but it's very, as said, it's a bit dependent on what type of model or what product lines we are looking at here. When we look at the labs systems, there is still traction to or request for the hematology lines. We have no sign that we are losing for competition. This is why we also emphasize the macroscopic environment in our report, and the factors that I've alluded to. In terms of the small DC-1, especially I mentioned that in Americas we really have traction with the network hospital labs.
In general in Q4 , I'd say we've probably doubled our CellaVision DC-1s pretty much across every region. If we look at the year and look at the growth, it's very similar to last year. The volume growth we re-reported last year in the annual report was 56%. We're in the same range. Maybe a little bit higher if we look at the growth rate for the human labs and maybe a little bit slower if we include the category of CellaVision DC-1 for the mid category. A lot of traction. The main part of the incremental growth is coming out of the U.S. With regard to reagents, here we had SEK 25 million and only SEK 23 million in EMEA, a little bit soft.
We missed a bit on sales for our main market in France. We, even though there is usually not that much fluctuation between the quarters, we believe we can see that this is a type of a one-off for this quarter that we have a small dip. In terms of APAC, as you will see in the report, there is a lot of progress now that we are ready for commercialization after we've done our registration evaluations, et cetera, across multiple countries. We've just completed Thailand in this quarter. I'm pleased to see that now we're kind of doubling our APAC revenue. Now we are ending the year at SEK 3.5 million.
Where we had hardly any sales, pretty much nothing in Q4 last year, then now we have exceeded SEK 1 million in this quarter. Traction on the APAC side. Coming to software, it's a bit soft also because of the instrument situation. We do see some good traction in Europe for our high runners in terms of Remote Review, but also the Advanced RBC Application, and in fact, also the Body Fluid. The Advanced RBC Application and the Remote Review are our high runners, and we see growth in EMEA. We would probably, w e have a hypothesis that we're selling quite a number of DC-1s going into the network laboratories. They already have Remote Review.
So part of our software can actually be impacted by the fact that we have a lot of growth in building this ecosystem across the hospital networks. If they already have access and they don't increase the number of users, then that doesn't translate into incremental software revenue. All right. Coming to the summary slide here. I'd emphasize again that the underlying demand is unchanged. We really feel that we're in the middle of the woods of having external challenges that persists, not losing to competition, we began with a very strong momentum coming out of the COVID phase in Q4 and into H1 of 2021.
We've faced, given the entire cautiousness, that's what we see amongst our distribution partners, and that has certainly led to softer sales in the last two quarters. We have a lot of progress. We, in terms of what we do and our articulating our strategy and executing on the internal side and building the bandwidth to build these innovation programs. We've the team has also mitigated a number of supply chain disturbances, which we see much less of for the time being. We are really increasing our profound and deep foundational discussions with our customers and our distribution partners. We continue also on the new technologies that we have acquired and what we develop internally.
I really expect you to hear more about that in our in our quarters to come, probably starting next quarter with news on that agenda. Essentially, we are aiming to maintain and build and expand our superior product portfolio because we believe that the integrated ecosystem that we have started to install is the way we win long term. Bandwidth expansion has taken place successfully, now we are back within our financial target of being above 30%. We have a dip the last quarter with one-off, et cetera, and low sales. We are controlling our cost base diligently, we are pursuing our strategy plan as laid out. With that, I will open for questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Ulrik Trattner from Carnegie. Please go ahead.
Great. Thanks very much. Hi, guys. A few questions.
Hi, Ulrik.
Perhaps we can start off with the softer comments on or the soft comments on the U.S. market or the American market. You're alluding to macroeconomic factors. Is this something you're hearing from distributors? Would you not be surprised that you have a higher momentum for the DC-1 compared to the DM range if this were to be an effect of the, of macroeconomic factors?
I think the macroeconomic factors is, in the conversation we have had with our distribution partners, it certainly involves around Europe. It's more, that's where we see it the most. U.S. is more of a private market. So, this is one thing. I think the inventory management piece has been most profound in Europe, and we also believe that our performance in the U.S. Has actually been better as compared with U.S. Mostly impacting in Europe, I would say, when we talk about the macroeconomic factor, especially around cost of goods.
Yeah. Great. Can you give us some numbers on how the DM range is growing? I'm looking at 5% decline year-over-year for instruments in Americas. Since you're saying that the DC-1 continues to grow, how much is the DM range declining year-over-year? This is 5% reported. I'm guessing it's more organically as well. Is there a complete stop in, or was there a big tender that you were awarded in Q4 last year? What's sort of the reasoning behind the decline for quite a stable segment?
Yes. You're alluding only to the non-integrated system, right?
Yes.
Yeah. It's an observation. We can see we actually have solid growth in the integrated line. That can also be a sign of who's winning in the market, obviously. We see in general that the DMs is down. We don't disclose growth rate per product line. We can obviously see that the growth for the integrated system is really attractive out there.
Okay. Can you shed some more light on if this is correct or what I'm seeing in the number is a lower tax rate on software and others in the U.S., seeing that declining by five percentage points sequentially throughout the entirety of 2022. Is there any reason for a U.S. client to be less prone to buy the most advanced software and upgrades on your systems, or is this just temporarily affected?
No, I think right there I think there is a decline, but I think it's a function of us placing DC Ones in networked hospitals where they already have Remote Review installed. They built the ecosystems, but they may not have sufficient number of users. They upgrade the Remote Review, or they already have sufficient number of access to the Remote Review. We don't get the software sales because it's already there, so to speak.
Okay.
I think that's one of the reasons. Probably the main reason for that.
Okay. That's great. You mentioned price increases. How much are we talking about that's going to be implemented here from Q1? How much range do you have to go to your distributors and increase prices?
Yeah. It's obviously sensitive, given the confidentiality we have with individual partners. Usually we have only raised our prices with a few percentage points, and we are above that range this year around. It varies from product categories, and it also varies per partner. We are confident that we can regain part of the loss that we have seen with the impact of the inflation. Sorry.
Great. Two more questions on my end. At first would be, you sound more optimistic on not only customer supply chain but also your own supply chain. If I remember correctly, you've been buying inventory on the spot market for the last few quarters. I'm guessing that's going to reverse here in the first few quarters of 2023 or are we already seeing positive effects from not buying more expensive components?
Buddy, you're absolutely right that we have increased our inventory. We have increased our inventory, indeed. Depending on the components, that it may not just be a few quarters. For certain components we have acquired a little bit more, but we are starting to eat in on that, and we are not having the same as you correctly say, we're not in a situation where we are negotiating very high prices, on the standard components, so to speak. We're kind of out of that scene. We are more confident, I can confirm that.
It's fair to assume at least towards the second half of next year to have a more sort of positive gross margin development from reduction in pricing of components. Would you be confident in terms of that statement?
Yeah. Again, our gross margin is a function of few things, but I think what we control in terms of the pricing and our cost prices, our own cost, I'm confident from that perspective. Just to add the FX, it's gonna be tricky as well. What we can manage, we're doing the right thing for that.
Just one last question, and this would be on R&D spend. We have for the last few quarters, if we were to add the capitalized R&D spend together with your reported R&D spend, see a ramp up, and I'm guessing this is related to the expansion segments and the new platform. I think we talked about this in Q3. Is sort of this level of R&D spend expected to continue in terms of absolute level to support the new platform? I hear you saying that you will be able to present more about this perhaps already in the next quarter. But I'm guessing we're not supposed to see this as an IVD product in 2023.
Well, at least we will have output from our, one of our strategic pillars coming up soon. We're very excited about that. In terms of R&D spend, you're absolutely right that we this year have increased our cash going into the R&D team. This is pretty much the level where we wanna be. We don't foresee a dramatic increase going forward from here, because we've spent 2022 really spelling out our strategy and executing building the teams. This is also why our headcount has increased. We're pretty much at the level where we can execute. This is also what you see with the increase in capitalization, that we are spending less time on onboarding. Excuse me?
Yeah.
There is someone in the back who needs to mute. I think it's organizer.
I think actually it was my end. Sorry about that.
Oh, no problem.
Great. That was all questions from my end. Thank you very much, Simon.
Thanks, Ulrik.
The next question comes from Josefine Persson from Nordea. Please go ahead.
Hello, Simon, and thank you very much for taking my question. Yes, I need to get back a bit to the weak development in the Americas again. Can you please just give me some color on the difference that you see versus Q3? Can you give more explanation apart from the macro related explanation ?
Apart from, sorry, Josefine, apart from?
Sorry, apart from the macro related, explanation.
Yeah, I think the main difference that we see, we actually, even though the numbers, we've kind of crawled down a bit here, and we're up against a pretty reasonable Q4 last year. We should bear that in mind. I think what we've seen is that this quarter, the DM lines, they have been very limited in this very quarter. That's the major difference. In terms of the access to the labs, the appetite for solutions and also working with our partners in terms of working them to do joint launches, et cetera, we have a lot of traction. That has occurred over the course of Q4.
I think we come out of Q4 with optimisms for the activities that we do jointly with our partners. That was, that has really accelerated throughout this quarter.
All right. It sounds like you're, you believe that you're entering Q1 with a better momentum or?
At least what we can control, I think that's fair. I would be really honest to say that the outlook for the macroeconomic influences and the way the cost of capital, the management that our distribution partners is driving, that's really hard to tell. Are we out of the woods? That I can't guarantee. I don't have line of sight to that. I feel confident that we will flip around and grow our business. As I said, we have no signs that we are losing to competition. I feel confident that we are doing the right things, but it's not a quarterly game for us.
Well, it's also a quarterly game, don't get me wrong, but the things we work on is longer sales cycles and obviously investments into programs that we start to demonstrate in short time. Then it's a long run in doing the right things to have the winning solutions also in the future.
Right. Thank you very much. Another question: are we seeing the same pattern of hesitance among customers when it comes to replacement sales? Are the current customers considering waiting another year until they replace the instruments? Or, what is...
Yeah, it's a.
What kind of pattern do you see there?
Yeah, it's a good question. First of all, we can't see whether it's a replacement or a new. We're a bit uncertain whether the hospital environment is getting influenced. We don't have direct signs of that, but that's something we're trying to understand, whether the hospital, and especially in Europe, where you have public hospitals, are they getting impacted by the purchasing power going into exchanging replacements or just renew, just buying a line. That's hard for us to say. I like your question and we are working on understanding it ourselves.
Yes. All right. Thank you very much. Yeah, you mentioned that the distribution partners will postpone orders. When do you expect these orders to be placed, and do you think we can see, this happening in-
Yeah, that's really a function. Yeah. The thing is, I expect it to happen in 2023. Definitely.
Mm-hmm.
I don't think we're four quarters out, but I really wanna reserve and don't build up too many expectations for the very future that we can't see for the very near term future. It's really a matter of we can see there's a totally different focus on cost of capital now that interest rate pays in. That's a function of them driving down their inventory, but also, of course, it's a function of when they win the tenders and when they need to install.
Mm-hmm.
A little bit uncertain outlook on short term, but confidence that we will come back on a little bit longer, medium, short to medium horizon.
All right. Thank you very much. That was all for me.
Thanks, Josephine.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. The next question comes from Christian Lee from Pareto Securities. Please go ahead.
Hey, Christian. You may be on mute.
Yes. Good morning. Thank you for taking my questions. I was wondering, on back of the price adjustments starting from Q1, do you expect to maintain the gross margin at around 69% in 2023, or perhaps even better?
We're aiming to get back there, I would say. Of course, we would like to go better, but I think that's a fair estimate.
Excellent. Thank you. I know that you have perhaps started to implement the shift to subscription-based model for software. Have you started to implement this, and do you expect to have adverse impact on your software sales going forward?
Yeah, no, Christian, we haven't implemented that in our existing solutions. That's something we will implement in our future solutions going forward as we have new implications.
Okay. Thank you very much.
Pleasure
That's all from me. Thanks.
There are no more questions at this time, so I hand the conference back to you, Simon.
All right. Thank you very much, everybody for listening in. In summary, obviously we're facing some tough quarters on the top line. I'm proud to say that we are controlling our cost base and investing in the right programs. We truly believe we're doing the right things to execute our strategy and continue our leadership position within Digital Cell Morphology. With that, I wanna thank you also for a good year listening in and working together with all of you, and I'm looking forward to work hard and get out of the current situation with hard work and the right work. Thanks for now. Bye-bye.